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Winning the Hayekian Sweepstakes
November 29, 2010 Flotsam and Jetsam

In the Constitution of Liberty Hayek claims that society would be well served if we randomly selected 1 in 1000 people and endowed them with enough wealth so they could independently pursue any project of their choosing! The random part is important – if we had to decide as a “society” to reward a particular person for this windfall, we would be overselecting on existing known (mis)conceptions of meritorious activities and underselecting for characteristics that are representative of new, dynamic, earth-shattering, unknown ideas.

He even argued that most of these recipients would “waste” the money but that if only 1 in 100 recipients were successful, it may be well worth it. The evidence against this is that we’ve run this experiment in modified form via the various lotteries and tv contests and the like. Has there ever been a lottery winner or game show winner that went on to generate an earth shattering idea? A masterful novel or work of art? A change in how we view or consume culture generally? Offhand I cannot think of one, but we sure could test it. This guy surely fails the test. I feel bad for this guy. Here’s a greatest hits of lotto winner failures.

We’ll say more about this in the future. I was surprised when I first read it, but I think it has some merit. I would like about $4 million in the bank in order to feel “independent” enough to do great things. At 5% after-tax returns, that leaves $200,000 per year in income – enough to travel the world’s libraries and to purchase whatever I need to purchase to do great things. For the US to do this for every thousandth person, it would require an expenditure of $1.232 trillion.

Would that be a better use of $1.232 trillion than funding half the federal government? What would qualify as a good return?

"5" Comments
  1. I think the most succesful lottory winners (without any sort of proof to back this up) tend to be the ones who give it all away immediately or essentially pretend it never happened. I think there would be something about the “easy money” aspect; we’d have no idea how difficult it would be to actually obtain a loan (especially one of a million dollars), so most of our plans may only be half-hearted attempts. Also, even if someone has a good idea and tries to put it in practice, the million dollars may only delay the bankruptcy that so many people have with their ideas; sometimes it’s better to have less to begin because you have less to loose.

    This all now said, I’d like the money to pay off the house. (And pay someone to scrap off the wall paper paste, but I’ll also take volunteers. Or should I say, “Scraping wall paper paste is real fun! Why, you all should pay me just to be able to do the walls in my kitchen!”)

  2. The waste comment reminded me of….

    When the Phillies won the world series in 1980, somebody asked Tug McGraw how he was going to spend the bonus money players
    got for winning the series (recall free agency was in its infancy).

    “Ninety percent I’ll spend on good times, women and Irish Whiskey. The other ten percent I’ll probably waste.”

  3. What psychological and economic insight. Great work, Wintercow.

  4. By the way, 1.32 trillion is way too precise for the Feds, sort of like saying federal highballs will contain 1.32 ounces of booze, and the price of the drinks will be adjusted by the core CPI. These are the same people who argue that cutting the price of drinks will reduce gross revenue.

    The key decision is whether to start the Hayek lottery or not take other peoples’ money in the first place, and determining who gets to make that decision.

  5. Anonymous - Rochester 2010

    I like the post but I think you’re mistaken if you think that a modern day lottery is analogous to what Hayek is claiming. The premise is that the giveaway must be random so we can give money to a diverse group of people who otherwise might not receive money if we decided who receives the money. A random pull of 1 out of 1000 people is not the same as random pull of 1 out of 1000 lottery player’s. Reasonbeing, Lottery player’s act differently when it comes to making decisions at the margin. For instance, lottery player’s appear to have a risk diverse behaivor and might be very willing to spend money on activities that have a low success rate. So giving one of these people enough wealth to try some project of their choosing could lead to a failed project (measured by a low return). On the other hand those people who don’t play the lottery are fundamentally different than those who do. If we gave the $ to a random one of these people, the outcome of the experiment might be far different. And on average if we ran this experiment enough times, I think we would find far different returns on our investment if we gave the $ to 1 in 1000 random people vs 1 in 1000 lottery player’s.

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